In Re Bernard L. Madoff, Debtor v. Irving H. Picard

The opinion of the court was delivered by: John G. Koeltl, District Judge:

OPINION AND ORDER

These consolidated bankruptcy appeals arise out of the multi-billion dollar Ponzi scheme orchestrated by Bernard L. Madoff ("Madoff"), and the subsequent bankruptcy of Bernard L. Madoff Investment Securities LLC ("BLMIS") in the wake of the public revelation of that scheme. The appellants Adele Fox and Susanne Stone Marshall (collectively, the "Appellants") each invested money in BLMIS. After the bankruptcy proceedings began, Fox and Marshall filed separate class action lawsuits in the United State District Court for the Southern District of Florida (the "Florida Actions"), asserting Florida state law claims against Jeffrey Picower, an alleged Madoff co-conspirator, and other related defendants (collectively, the "Picower defendants"). The appellee, Irving H. Picard ("Picard" or the "Trustee"), is the trustee for the BLMIS estate pursuant to the Securities Investor Protection Act of 1970 ("SIPA"), 15 U.S.C. §§ 78aaa et seq. Picard now has reached a settlement agreement with the Picower defendants under which they will repay $5 billion to the BLMIS estate. In addition to the $5 billion, the Picower defendants agreed with the Government to forfeit approximately $2.2 billion. The result of these agreements is that the Picower defendants will return the total amount of their net withdrawals from BLMIS for the benefit of the other customers of BLMIS.

The Appellants appeal the declaration of the Bankruptcy Court (Lifland, B.J.) that the Florida Actions were void at the outset because they were commenced in violation of the automatic stay order in this case, as well as a preliminary injunction issued by the Bankruptcy Court enjoining the Appellants from proceeding with the Florida Actions. The Appellants also appeal the Bankruptcy Court's approval, in a later decision, of the settlement reached by Picard with the Picower defendants, and its issuance of a final injunction precluding the assertion of claims that were duplicative or derivative of claims brought by the Trustee, or that could have been brought by the Trustee, against the Picower defendants.

The Bankruptcy Court was plainly correct in finding that the Florida Actions violated the automatic stay and should be preliminarily enjoined. They were a transparent effort to pursue claims against the Picower defendants that were duplicative of claims brought by the Trustee and that belonged to the Trustee on behalf of all the creditors of BLMIS. Similarly, the Bankruptcy Court was correct in approving the settlement with the Picower defendants that was extraordinarily beneficial to the BLMIS estate, and in enjoining claims against the Picower defendants duplicative of those brought by or which could have been brought by the Trustee.

I.

In December, 2008, Madoff was arrested and charged with criminal violations of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R. § 240.10b--5 in the United States District Court for the Southern District of New York in connection with a massive securities fraud scheme. Secs. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC ("Automatic Stay Decision"), 429 B.R. 423, 426 (Bankr. S.D.N.Y. 2010). The SEC also filed a civil lawsuit against Madoff and BLMIS. Id.

On December 15, 2008, the District Court granted a motion by the Securities Investor Protection Corporation ("SIPC") to place those who had invested money with BLMIS ("BLMIS customers") under the protection of SIPA and issued a Protective Order. Id.; see also Protective Order filed Dec. 15, 2008, (the "Dec. 15 Protective Order"), Secs. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, Case No. 08-1789 (Bankr. S.D.N.Y.), ECF No. 1. Appellee Picard was appointed as the trustee for the SIPA liquidation of BLMIS, and the liquidation proceedings were transferred to the Bankruptcy Court. Automatic Stay Decision, 429 B.R. at 426. Under SIPA, Picard has the powers and duties of a bankruptcy trustee, and is charged with, among other things, recovering the property of BLMIS's customers, and distributing those assets. See 15 U.S.C. §§ 78fff--1(a)-(b). On December 23, 2008, the Bankruptcy Court entered an order setting forth the process by which BLMIS customers could file claims with Picard, by which Picard would determine those claims, and by which any objections to Picard's determinations would be adjudicated. See Automatic Stay Decision, 429 B.R. at 426. Fox and Marshall eventually filed claims with the Trustee pursuant to that process. The District Court's December 15 Protective Order also invoked the automatic stay provisions of 11 U.S.C. § 362(a), staying "any act to obtain possession of property of the estate or property from the estate." Dec. 15 Protective Order at 2.

Under SIPA, "customers share pro rata in customer property" recovered by the trustee "to the extent of their net equities."

Automatic Stay Decision, 429 B.R. at 427 (citing 15 U.S.C. § 78fff--2(c)(1)(B)); see also 15 U.S.C. § 78lll(11) (defining "Net Equity"). In March, 2010, the Bankruptcy Court issued a decision on the question of how BLMIS customers' net equity in BLMIS would be determined. The Bankruptcy Court "approv[ed] the Trustee's method of calculating a customer's Net Equity as the amount of cash deposited into the customer's BLMIS account, less any amounts withdrawn from the customer's BLMIS account (the 'Net Investment Method')." See Automatic Stay Decision, 429 B.R. at 427 (citing SIPC v. BLMIS (the "Net Equity Decision"), 424 B.R. 122, 135, 140 (Bankr. S.D.N.Y. 2010)). As a result of the Net Equity Decision, BLMIS customers who had withdrawn more from their BLMIS accounts than their principal investments, so-called "net winners," are not entitled to a share of the property recovered by the Trustee until all "net losers" have received back their principal investments. The fact that customers thought though they had profits that turned out to be fictitious did not entitle them to those profits. The Court of Appeals for the Second Circuit subsequently affirmed the Bankruptcy Court's Net Equity Decision. See In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 235 (2d Cir. 2011) ("Mr. Picard's selection of the Net Investment Method was more consistent with the statutory definition of 'net equity' than any other method advocated by the parties or perceived by this Court.").

Appellant Marshall filed her claim with the Trustee in January 2009. Picard allowed her claim in July, 2009, in the amount of $30,000, the amount of Marshall's initial deposit with BLMIS. The final balance on Marshall's BLMIS account statement was $202,836.91. Marshall received a payment of $30,000 from Picard in August, 2009. Before receiving that payment, "Marshall executed an assignment and release of any claims against BLMIS or third parties for, inter alia, any illegal or fraudulent activity with respect to her BLMIS account that gave rise to her customer claim against BLMIS." Automatic Stay Decision, 429 B.R. at 428.

Appellant Fox had two accounts with BLMIS, the final balances of which were $887,420 and $1,948,718 respectively.

Id. Fox does not contest that she does not have net equity in either account, having withdrawn amounts greater than her principal investment, and thus is barred by the terms of the Net Equity Decision from receiving payments through the liquidation until all BLMIS customers have received back their principal investments. Fox filed claims with the Trustee, which were denied. See Adele Fox's Objection to Trustee's Determination of Claim, Secs. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, Case No. 08-1789 (Bankr. S.D.N.Y. June 2, 2010), ECF No. 2354, Ex. A (Determination of Claim); Adele Fox's Objection to Trustee's Determination of Claim, Secs. Investor Prot. Corp. v. Bernard L. Madoff Inv. Secs. LLC, Case No. 08-1789 (Bankr. S.D.N.Y. Dec. 15, 2010), ECF No. 3498, Ex. A (Determination of Claim). Fox objected to those determinations. She received no payment from the Trustee.

In May, 2009, as part of his efforts to recover funds for the BLMIS estate, Picard filed an adversary proceeding against the Picower defendants (the "New York Action") for, among other things, fraudulent transfers and conveyances made by the Picower defendants as part of their conspiracy with Madoff. The Trustee relied on 11 U.S.C. §§ 544, 547, 548, and 550, the New York Uniform Fraudulent Conveyance Act, N.Y. Debt. & Cred. Law §§ 270-281, and other applicable law relating to turnover, accounting, preferences and fraudulent conveyances. See Complaint at ¶¶ 1-5, Picard v. Picower, Case No. 09-1197 (Bankr. S.D.N.Y. May 12, 2009), ECF No. 1 ("Picard Compl."). The complaint in the New York Action sought to recover more than $6.7 billion from the Picower defendants. Picard then began settlement negotiations with the Picower defendants. Automatic Stay Decision, 429 B.R. at 429. Picard ultimately identified $7.2 billion in net withdrawals from BLMIS by the Picower defendants. See Settlement Order dated January 13 ("Settlement Order"), Picard v. Picower, Case No. 09-1197 (Bankr. S.D.N.Y. Jan. 13, 2011), ECF NO. 43, Ex. A ("Settlement Agreement"), at 2.

On February 16, 2010, while those settlement negotiations were ongoing, Fox filed a class action lawsuit against the Picower defendants in the United States District Court for the Southern District of Florida, alleging Florida state law claims for, among other things, conversion, unjust enrichment, conspiracy and state RICO violations. See Amended Complaint at ¶ 4, Fox v. Picower, No. 10 Civ. 80252 (S.D. Fla. Mar. 15, 2010), ECF No. 5 (the "Fox Complaint"); see also Automatic Stay Decision, 429 B.R. at 429. The Fox class, according to Fox's complaint, comprises "all persons or entities . . . who have not received the net account value scheduled in their BLMIS accounts as of the day before the . . . SIPA Liquidation." Fox Complaint ¶ 74; Automatic Stay Decision, 429 B.R. at 429. The next day Marshall filed a class action lawsuit in the same court, alleging the same claims against the Picower defendants. The Marshall class comprises "all SIPA Payees, but only with respect to claims, or portions thereof, not assigned to the Trustee." Automatic Stay Decision, 429 B.R. at 429. It is undisputed that the Fox and Marshall complaints are based on the same factual allegations as Picard's complaint against the Picower defendants, namely that the Picower defendants participated in a Ponzi scheme with Madoff, and that they benefitted from it by withdrawing billions of dollars that they knew belonged to other BLMIS investors. The Fox and Marshall complaints allege damages "in the form of lost investment income and returns on their BLMIS investments, and tax payments made in connection with nonexistent profits." Id. The Fox complaint also alleges damages premised on the class members' exposure to Picard's "clawback efforts." Id. The Fox and Marshall classes seek "compensatory damages, prejudgment interest, an equitable accounting and the imposition of a constructive trust, disgorgement of ill gotten gains or restitution, treble damages, and punitive damages."

Id. Both Fox and Marshall amended their Florida complaints on March 15, 2010.

On March 31, 2010, Picard commenced an action in the Bankruptcy Court to enjoin the Florida Actions. Id. at 430. Picard sought a declaration that the Florida Actions were barred by the automatic stay provisions of 11 U.S.C § 362(a). Picard also sought a preliminary injunction pursuant to 11 U.S.C. § 105(a), which allows courts to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions" of the Bankruptcy Code. Picard sought to enjoin Fox and Marshall from further prosecuting the Florida Actions.

The Bankruptcy Court granted these applications on May 3, 2010. The Bankruptcy Court held that the claims in the Florida Actions were covered by the automatic stay under § 362(a), finding that, "the claims asserted in the Florida Actions seek to redress a harm common to all BLMIS customer claimants and, consistent with the purposes of the automatic stay, belong exclusively to the Trustee." Automatic Stay Decision, 429 B.R. at 432. The Court also found that the Florida Actions violated the part of the District Court's December 15 Protective Order "declaring that 'all persons and entities are stayed, enjoined and restrained from directly or indirectly . . . interfering with any assets or property owned, controlled or in the possession of BLMIS.'" Id. at 433 (alterations omitted). The Bankruptcy Court held that the Florida actions were "void ab initio" because they were commenced in violation of the automatic stay. Id. at 433-34 (citing In re Colonial Realty Co., 980 F.2d 125, 137 (2d Cir. 1992)). The Bankruptcy Court also issued a preliminary injunction pursuant to § 105(a), "[t]o the extent section 362(a) and the District Court Stay Orders do not apply in their own right to stay the Florida Actions," finding that the Florida Actions threatened the BLMIS estate, and the Bankruptcy Court's jurisdiction over its administration. Id. at 434. Fox and Marshall appeal this order.

In August, 2010, the Bankruptcy Court issued a "Striking Order," which struck from the Appellants' statements of issues to be presented on appeal the fifth issue listed, which concerned the Bankruptcy Court's subject matter jurisdiction.

After the Bankruptcy Court's ruling on the preliminary injunction, Picard reached a settlement with the Picower defendants pursuant to which the Picower defendants agreed to return $5 billion to the BLMIS estate, and to forfeit an additional amount of over $2.2 billion to the Government. See Settlement Agreement at 3. That money, over $7.2 billion in total, is currently in escrow pending the entry of a final, non-appealable order approving the settlement. Id. As part of the settlement agreement, Picard agreed to seek a permanent injunction pursuant to § 105(a) barring claims against the Picower defendants by BLMIS investors that are duplicative or derivative of the claims that were brought, or that could have been brought, by Picard. See id. at 5-6.

In December, 2010, Picard filed a motion in the Bankruptcy Court to approve the settlement, and to enter a permanent injunction as contemplated by the settlement agreement. Fox and Marshall objected to the settlement and the permanent injunction. See Settlement Order at 1-2. In a January 2011 Order, the Bankruptcy Court approved the settlement, finding that the settlement was fair, reasonable, equitable, and in the best interests of the BLMIS estate. Id. at 6.

The Bankruptcy Court also issued a permanent injunction barring claims against the Picower defendants by third parties that are duplicative or derivative of the claims that were brought, or that could have been brought, by Picard. See id. at 6-7.

The current appeals concern a number of the Bankruptcy Court's orders. Fox and Marshall appeal the order of the Bankruptcy Court declaring that the Florida Actions violated the automatic stay, and were therefore void ab initio, and the preliminary injunction issued by the Bankruptcy Court pursuant to § 105(a) enjoining the Appellants from proceeding with the Florida Actions to the extent that those actions were not barred by § 362(a). Fox and Marshall also appeal the Bankruptcy Court's order striking certain issues and corresponding portions of the record from their appeal of those rulings. Fox and Marshall also appeal separately the Bankruptcy Court's order approving the settlement agreement entered into by Picard with the Picower defendants, and the issuance of the permanent injunction that accompanied the approval of the settlement to the extent that it permanently bars them from prosecuting the Florida Actions.

As an initial matter, Fox and Marshall appeal the Bankruptcy Court's Striking Order. They argue that the Bankruptcy Court exceeded its jurisdiction by striking the fifth issue from their statement of issues on appeal. The issue that the Bankruptcy Court struck was "[w]hether the Bankruptcy Court erred by not determining that the trustee . . . was barred by the doctrine of in pari delecto [sic] from pursuing the claims asserted by the Appellants in their complaints in Florida federal court . . . ." Designation of ...

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